Who Hides Money Outside The Country?

Over the past decade, some 39,000 people have come forward voluntarily to tell the IRS about offshore money they haven't been paying taxes on. This group provides a small window into the world of people who are hiding money in offshore havens. (It's a world we've been trying to learn more about, partly by setting up an offshore company in Belize.)

The names of the 39,000 aren't published anywhere, and they're not eager to be interviewed. But I did find Charles Falk, a lawyer who has represented more than 200 of these people.

Sometimes they're business owners, who have earned money abroad and stashed it in Switzerland or on some island. Maybe the account is owned by a trust they secretly control. Sometimes they're hiding money from a spouse. When I asked him if any of his clients would talk to me, he laughed. But he did describe a typical first call with a client.

"A lot of times," Falk says, "the conversation will go like this: 'They can take all the money. I just don't want to go to jail.' And then when you assure them they are not going to go to jail if they come forward, then the next thing they say is, 'Well, how much can I keep?'"

Other people who come forward aren't even sure they've done anything wrong.

Marvin Van Horn and his wife live in New Zealand, where they have a checking account and retirement savings. They weren't intentionally hiding anything from the IRS. But he heard a story on the radio about offshore tax cheats — and realized that the rules might apply to him.

So he decided to go through the IRS's voluntary disclosure program. He learned he would have to pay back taxes for six years, which came to about $20,000. That seemed fair, he said. But then there was the penalty: $172,000.

Van Horn says the penalty would have gutted his retirement savings. So he appealed. And after 851 days (he was counting), the penalty was reduced to $20,000.

There's a spectrum in these cases, attorneys say. There are people who went to great lengths to hide money, people who didn't know they were hiding money, and a lot of people in between.

One other thing about the 39,000 people have come forward so far: They're probably a drop in the bucket. Somewhere between five and seven million U.S. citizens live abroad. Fewer than 1 million of them declare offshore accounts, as required by law.

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Transcript

MELISSA BLOCK, HOST:

It's no secret that some Americans hide money offshore to avoid paying U.S. taxes. But because the accounts are overseas, it's hard to know who these people are or how much they're hiding. We do have some idea, though. Over the past decade, about 39,000 people have disclosed offshore money they haven't been paying taxes on. They've come forward through voluntary disclosure programs set up by the IRS. The deal: Come clean, and we'll go easier on you.

David Kestenbaum with our Planet Money team has this story about who these people are and what it's like to come clean.

DAVID KESTENBAUM, BYLINE: The names of these 39,000 people are not published anywhere. And people who have hidden money aren't exactly eager to be interviewed. I was able to find someone who they do talk to, though. Before people go to the IRS, they usually call to a lawyer. And sometimes, that lawyer is Charles Falk.

CHARLES FALK: First thing they say is: Are you so and so? And I say: Yes. And then invariably, they'll always say: And is it safe to talk on the phone? And I always say to them: Yeah.

KESTENBAUM: Falk has had over 200 clients who've come forward with offshore money. Sometimes they're business owners who've earned money abroad and stashed it in Switzerland or on some island. Maybe the account is owned by a trust they secretly control. Sometimes they're hiding money from a spouse. I asked if any of them would talk to me.

FALK: No, I don't think so.

(LAUGHTER)

KESTENBAUM: When these people call Falk, they're often worried about getting in trouble.

FALK: A lot of times, we'll have - the conversation will go like this. Listen, they can take all the money. They can take all the money. I just don't want to go to jail. I don't want to go to jail. I'll give them all the money.

Ok. And then once you assure them that they're not going to go to jail if they come forward, then the next thing they say is: Well, how much of it can I keep?

(LAUGHTER)

KESTENBAUM: So that is one category of people who have money offshore and have come forward. But there is another category. Marvin Van Horn found out about this second group when he was on vacation. He was in the car with his wife, listening, as it turns out, to a Public Radio. The story about offshore tax cheats. And his first thought was: Yeah, IRS, go get them. And his second thought was: Uh-oh, because they lived in New Zealand.

MARVIN VAN HORN: I remember turning to my wife and said: Are they talking about us? It was kind of like, oh. She says: No. No, no. They're talking about all those rich people that are, you know, hiding money overseas and stuff. We're not doing that. And I said: No, but we live offshore, so to speak. I think that might involve us.

KESTENBAUM: It did involve them. They had a checking account at a local bank in New Zealand and retirement savings. They were supposed to be reporting that they had these things and paying taxes on any earnings from that money. Van Horn says he wasn't intentionally hiding anything.

He decided to go through the voluntary disclosure program. A woman from the IRS called him up to talk through everything, said he would have to pay back taxes for six years, which he said seemed fair. That was about $20,000. But then there was the penalty, which can be huge in offshore cases. The way the IRS calculates the penalty has nothing to do with the amount of taxes owed. It's calculated as a percentage of everything you have overseas that you hadn't disclosed. And for Van Horn, the penalty came to $172,000.

HORN: And, you know, I fell on the floor. I said: You're - what? That would have gutted our savings and our retirement savings.

KESTENBAUM: Van Horn appealed, wrote letters. And after what he says was a very stressful 851 days - he counted- he got the penalty reduced from $172,000 to $20,000.

The IRS declined an interview request for this story. But Charles Falk and other attorneys who have handled offshore voluntary disclosure cases say there's a spectrum. There are people who went to great lengths to hide money, and there are people who didn't know they were hiding money from the IRS, and then there are a lot of people in between.

One other thing about those 39,000 people who have come forward so far, they are probably a drop in the bucket. Estimates are that something like five to seven million U.S. citizens live abroad. The number of taxpayers who are declaring offshore accounts as required by law, it is a tiny fraction of that: fewer than a million. David Kestenbaum, NPR News.